Weekly Market Review and Outlook

US Federal Government Shutdown: Market Impact and Economic Considerations

The US federal government entered a shutdown at the start of the new fiscal year on October 1, due to Congress’s inability to pass a single appropriations bill. While this disruption affects government employees, their families, and projects—especially in states led by opposition parties—the capital markets have largely remained unfazed. Notably, high-frequency economic releases such as the September employment report were unavailable. Nevertheless, key equity benchmarks including the S&P 500 and Nasdaq reached new record highs ahead of the weekend. Similarly, Europe’s Stoxx 600, the MSCI Asia Pacific Index, and the MSCI Emerging Market Equity Index also posted gains.

In fixed income markets, the 10-year US Treasury yield declined by nearly three basis points last week—the largest drop among G10 currencies—while the two-year Treasury yield saw a fall of just over five basis points, despite a nearly three-basis-point reversal late in the week. The US dollar weakened against all major currencies except the Canadian dollar, which underperformed amid a generally soft greenback environment.

The government shutdown appears set to persist into the following week, with no immediate resolution evident. Both political parties appear to be positioning themselves advantageously ahead of November’s midterm elections.

Global Political Developments

– **Japan:** The Liberal Democratic Party (LDP) selected Sanae Takaichi as its new leader, making her the likely next prime minister. The formal vote in the Diet is expected later this month. Takaichi marks the first woman to lead the LDP.

– **Czech Republic:** Upcoming elections are expected to return populist Prime Minister Andrej Babis to power, potentially leading to a reduction in direct military aid to Ukraine.

Data Environment: Limited Releases from Major Economies

With the US government shutdown limiting federal data dissemination and the extended holiday in China, information flow from the world’s two largest economies remains sparse.

The Reserve Bank of New Zealand is the sole G10 central bank scheduled to announce policy in the coming week. Market consensus and economists lean towards a 50 basis point rate cut, though swap pricing is less convinced. Other notable data releases include labor earnings and household spending from Japan; German factory orders and industrial production; Canadian trade and employment figures; and Mexico’s September consumer price index and industrial output.

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Regional Market Updates and Economic Indicators

United States

Market Drivers and Outlook

Historical patterns suggest that US government shutdowns typically impart minimal disruption to capital markets or economic momentum. The conventional estimate is that each week of closure reduces GDP growth by approximately 0.1%. Given the abundance of private sector and Federal Reserve data, monetary policy decisions remain oriented toward future economic conditions, with a rate adjustment still likely by month’s end.

Despite this, no near-term progress on reopening the government is anticipated, complicating resolution prospects.

Data Releases

Federal Reserve data publication will continue during the shutdown period. Key releases next week include:

– August consumer credit figures
– Minutes from the latest FOMC meeting, notably covering Governor Miran’s inaugural meeting and his remarks on the impact of former President Trump’s policies reducing the real neutral interest rate (r\*) toward zero
– Preliminary October University of Michigan consumer sentiment survey

Meanwhile, Treasury debt issuance proceeds uninterrupted, with plans to auction nearly $119 billion in coupon-bearing securities and over $250 billion in bills.

Market Prices

The US Dollar Index halted a two-week rally, retreating approximately 0.4%. Price action remains consolidative within the 97.40 to 98.15 range, with no definitive technical break currently evident. Sentiment continues to favor a bearish outlook for the US dollar absent new catalysts.

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Eurozone

Market and Economic Drivers

Following the September 17 FOMC meeting, the euro’s downside momentum has moderated. The currency broadly correlates with the differential between US and German two-year interest rates.

Germany’s looming data releases—factory orders, industrial production, and trade figures—are expected to shed further light on the largest Eurozone economy, which has struggled with stagnation in the first half of 2024 and is forecast to have expanded by a mere 0.1% in Q3. Additional regional reports include France’s trade balance and industrial output from Italy and Spain, though their market impact is generally muted.

Political tensions persist, with French Socialists criticizing Prime Minister Lecornu’s budget and threatening a possible confidence vote. Moody’s is set to review Belgium’s Aa3 (AA-) credit rating next week, maintaining a negative outlook. Belgian 10-year yields remain roughly aligned with Spain’s, about 55 basis points above Germany’s.

Market Prices

The euro appreciated approximately 0.25% last week, achieving its seventh gain in ten weeks. Key technical levels to watch include resistance near $1.1780 and $1.1815. Support remains strong above $1.1645, a level not breached since the Fed’s September rate cut, with recent lows around $1.1685. Momentum indicators remain neutral, suggesting further consolidation.

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China

Market and Data Overview

Chinese authorities continue managing the yuan’s stability against the dollar. Chinese financial markets are presently closed for the national holiday until October 9.

Potential data releases for the abbreviated week include September foreign exchange reserves and lending figures. The gold market may also react to updates on the People’s Bank of China’s (PBOC) gold purchases.

Market Prices

At market close prior to the holiday, the US dollar traded near CNH7.1300. Since then, it has oscillated narrowly between approximately CNH7.1225 and CNH7.1400. Given the limited market activity without mainland participation, significant moves are unlikely until reopening, with a downward adjustment probable.

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Japan

Economic and Political Drivers

The yen remains sensitive to US interest rate developments. The election of Takaichi as LDP leader and prospective prime minister could influence Japan’s bond market, reflecting her stance favoring stimulus measures and supplemental budgets. She advocates for continued BOJ monetary easing, emphasizing governmental responsibility for both fiscal and monetary policies while tasking the BOJ with optimal policy implementation.

Labor earnings and household spending data will be released, factors which may influence BOJ policy expectations. Market pricing currently assigns roughly a 75% probability to a rate hike by year-end and around 56% chance of such a move in October, despite an unexpected uptick in unemployment. Additionally, August’s current account surplus report is scheduled, driven largely by capital income from past investments, as Japan maintains a small trade deficit despite a generally undervalued yen.

Market Prices

The US dollar declined from near JPY150 in late September to approximately JPY146.60 last week. Technical support near JPY146.50 suggests potential targeting of the September 17 two-month low at JPY145.50 if breached. However, Takaichi’s election may tilt sentiment toward dollar strength, with a break above JPY147.85 likely opening the path toward the JPY148.25-65 range.

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United Kingdom

Market Drivers

Sterling’s movements are heavily influenced by the US dollar’s broader direction, as reflected in the Dollar Index, with an inverse correlation of approximately 0.90 over 30 days and 0.85 over 60 days. Occasionally, extreme fluctuations in UK long-term gilt yields exert additional pressure on the exchange rate.

Data and Price Action

The UK economic calendar is relatively light, highlighting construction PMI and house price data, which generally exert limited influence on markets.

Sterling’s recovery early last week stalled near the 50% retracement level of its decline since the Fed’s rate cut, around $1.3525. A sustained break above here could lead to gains toward $1.3570, while downside support lies near $1.3400. Breaking below $1.3370 may prompt a retest of the recent low close to $1.3325. Momentum indicators provide moderate support for the currency.

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Canada

Market Dynamics

The Canadian dollar’s trajectory remains closely tied to US dollar developments, with a rolling 30-day correlation near 0.65—stable above the 0.60 level for over five months. An inverse correlation of approximately -0.55 with the S&P 500 emphasizes the influence of risk sentiment on CAD moves. Trade tensions with both the US and China have dampened economic performance, with the swaps market pricing in roughly a 95% likelihood of a rate cut in Q4.

Key Data Releases

Canada’s August merchandise trade balance, due October 7, will receive attention amid Q2 GDP drag from trade deficits. The goods trade shortfall through July reached approximately C$24.5 billion, compared to about C$3.5 billion in the same period during 2024. Employment growth has decelerated substantially this year, with September’s employment report expected on October 10. Year-to-date job creation totals roughly 37,500, including a slight decline in full-time positions. The unemployment rate stood at 7.1% in August, the highest since the pandemic.

Price Levels

The US dollar touched CAD1.3985 last week, its strongest level since May, narrowly missing a close above the 200-day moving average near CAD1.3990. Resistance extends toward CAD1.4020. Momentum is stretched, hinting at possible near-term retracement, though a break above resistance could still occur but may lack sustainability. A move under CAD1.39 would increase the probability that a peak is in place.

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Australia and New Zealand

Market Drivers

The Australian dollar’s inverse correlation with the Dollar Index remains strong near -0.80 over 30 days, approaching the year-to-date extreme recorded in August. Correlations with two-year interest rate differentials and US Treasury yields illustrate nuanced influences.

The Reserve Bank of New Zealand meets on October 8 and is widely expected to deliver another rate cut, extending an easing cycle that began last August when the overnight cash target was 5.50%. The current rate is 3.00%, and swap markets envisage a terminal rate near 2.25%, discounting further easing into next year. Sweden’s Riksbank Deputy Governor Breman will assume the RBNZ governorship starting December 1.

Market Prices

After a nearly 1% rise last week following a 1.6% decline over the prior two weeks, the Australian dollar’s high near $0.6630 holds some resistance. Price action remains range-bound between roughly $0.6570 and $0.6635, with momentum suggesting continued sideways movement and a possible upward bias. A sustained break above the $0.6630-35 zone may target the $0.6700 level.

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Mexico

Currency and Economic Context

The USD-MXN exchange rate exhibits a strong positive correlation with the Dollar Index of over 0.75 for 30-day and 60-day periods, representing the highest levels in over a decade. Correlations with US two- and 10-year Treasury yields have softened slightly from recent peaks.

The Bank of Mexico’s policy meeting is scheduled for November 6; however, the September CPI report on October 9 will be the last full-month inflation read prior to the decision. While headline inflation remains within the central bank’s 3% ± 1% target range, core inflation holds above 4%. The central bank prioritizes economic growth, expecting easing price pressures.

Industrial production is expected to show a continued contraction, falling approximately 0.7% through July. After 0.6% growth in Q2, the economy may have stalled in Q3, with year-over-year growth at just 0.1%. The current overnight cash rate target is 7.50%, with swap markets considering the terminal rate likely nearer 6.75%.

Currency Movements

The US dollar depreciated against the Mexican peso in early September, reaching a yearly low near MXN18.20 on September 17. Since then, the dollar has traded within a volatile range, peaking near MXN18.5650 before falling back to approximately MXN18.24 midweek. It rose again to around MXN18.5160 late last week but has not closed above MXN18.50 since early September. Near-term directional conviction remains muted. The interest rate differential continues to favor a long peso position, with a close above MXN18.50–51 potentially targeting MXN18.60–65.

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Disclaimer

This report is provided for informational purposes and should not be construed as investment advice. Market conditions can change rapidly. Readers should consult their own advisors before making financial decisions.